It’s all about shareholder fees, not operating costs.

The former detracts to alpha, the latter adds to it.

In fact, a paper published last summer shows that (“direct-sold”) mutual funds that spend more on management than on distribution tend to have performance returns far exceeding that of (“broker-sold”) funds whose spending is focused on distribution.

What’s more, this research concludes that performance advantage of direct-sold mutual funds erases any theoretical advantage index funds have over actively managed funds.

Of course, some economists suggest buying lower-performing funds might be justified in the case of certain investors – except for 401(k) plan sponsors. (Interested in reading more about this? It’s all spelled out in “401k Plan Sponsor Fiduciary Alert: Conflicts-of-Interest More Important than Mutual Fund Expense Ratios,” FiduciaryNews.com, January 13, 2015.)

So there you have it. After decades of claiming high expense ratios are bad, we now have empirical evidence that high expense ratios are … the wrong thing to look at!

For the most part, expense ratios represent the cost of doing business for mutual funds. They include paying for regulators, legal and accounting professionals, and professional investment management.

All these operating costs help the mutual fund protect the best interests of fund shareholders. These are all reported in the Fee Table located on Page 2 of the fund prospectus under “Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment).” This is where the fund’s expense ratio is disclosed. With two important exceptions (I’ll get to those in a second), plan sponsors should understand these are “good” fees.

Just above this section and at the top of the Fee Table is a section labeled “Shareholder Fees (fees paid directly from your investment).” These are the fees identified by researchers as those associated with broker-sold funds. Remember, those are the mutual funds that regularly underperform compared to direct-sold funds. Ergo, if you’re a 401(k) plan sponsor, you risk breaching your fiduciary duty if your plan menu contains funds with these fees. You can call these “bad” fees.

It sounds easy, right? Ignore the expense ratio and focus on shareholder fees, and the 401(k) plan sponsor has it made. Ah, if only that were true. In its infinite wisdom, the SEC currently permits some shareholder fees to be included in the expense ratio. That means the expense ratio is still an important factor. There’s good news and bad news on this. The SEC requires one such fee – the infamous 12b-1 fee – to be disclosed on a specific line in the “Annual Fund Operating Expenses” section of the Fee Table. This makes it quite easy to find these troublesome fees (according to ICI reports, only one in 10 401(k) plans still retain funds with 12b-1 fees). That’s the good news.

The bad news, well, that’s revenue sharing. It is neither disclosed in a consistent place nor in an easy-to-understand format. For a long time, these fees remained hidden from shareholders. Technically, they need to be disclosed under Rule 408(b)(2) (The 401(k) Fee Disclosure Rule), but, without a simple one-page template requirement on the part of the DOL, these disclosures are often obscured in a sea of irrelevant numbers, data, and lengthy URLs. Good luck finding those, even if you’re a professional fiduciary!

As you might expect, life gets more complicated than simply looking at these fees. While these fees are considered “conflict-of-interest fees” (still legal, for the most part, per DOL advisory opinions), they don’t represent the be-all and end-all of conflicts-of-interest. It also remains legal for some plan advisors to recommend and place affiliated mutual funds in client 401(k) plan menus. One study shows low-performing affiliated funds are generally not removed from the plan menu and cause retirement savers to lose 4% a year on average.

Good fees. Bad fees. Conflict-of-Interest fees. Whatever the case, the important thing for plan sponsors to know is that it’s not the size of the fee, it’s the nature of the fee.

Of course, that nuance eats up too much headline space to get anywhere in today’s soundbite media.

— More by Chris Carosa on ThinkAdvisor: